ETF Securities says that Italy’s general elections will be the most significant political event for the European Union in 2018…
Recent polls suggest a hung parliament is among the most likely outcomes of the Italian general election. Taking into consideration that 35% of the voters are undecided, that could still swing the result. However, no single party will have the ability to govern by itself. An inconclusive vote is likely to be followed by repeat elections, with stand-in Prime Minister Paolo Gentiloni set for an extended run in office. Since Gentiloni’s popularity has risen during his term, this could bode well for the interim period when adjustments to the 2018 budget are outlined in April.
Impact on markets and the wider European project
The upcoming general elections are unlikely to be disruptive to markets. Current 10-year Italy – German bond spreads are pricing in a discount for the electoral uncertainty, we do not expect this to widen any further – while the growing likelihood of a hung parliament unlocks a period of stalemate, it significantly lowers the probability of a clash with the EU over public finance targets.
The key political parties in the race for the March 2018 general elections have recently withdrawn from the idea of leaving the Eurozone, this has helped reduce the risk considerably. However, the bloc’s rules on deficit and debt are a hurdle to the Italian parties’ growth oriented policies. It is evident that the newly elected government will be faced with the challenge of revising EU fiscal rules. If a compromise is reached, it will prevent a political crisis from erupting within the bloc.
Meanwhile the odds of (one in three chance in the latest polls) a “grand coalition” between the incumbent Democratic Party and the more conservative Forza Italia, has largely been viewed as the most beneficial outcome in terms of EU relations.